What is the purpose of the new social investment tax relief?
Traditionally, social enterprises have had to rely upon government funding, donations or grants to access finance to grow. To challenge the status quo, the government launched a number of policies and initiatives to encourage individuals and institutions to support social enterprises. This included the introduction of the world’s first tax relief for social investments. Social investment tax relief, which was introduced from 6 April 2014, aims to incentivise prospective social investors to invest in social enterprises.
So, what is social investing?
Social investment can be defined by its social and financial aims. The social investors expect to contribute towards a positive social change through their investment and, with time, they expect their investment (usually with interest) to be repaid. The investment will be used to grow and scale the organisation and thus maximising the social impact which can be achieved.
Is it only equity investments which qualify for social investment tax relief?
Social investment tax relief is available to social investors who subscribe for shares or make a debt investment in a qualifying social enterprise. The inclusion of tax relief on debt investments is a distinguishing feature of the tax relief and is fundamental to its success. Many social enterprises are structured without a share capital (being community interest companies, charities and companies limited by guarantee) and, as such, will only be able to accept investment in the form of loans.
What is social investment tax relief?
The tax incentives for social investments are similar to the tax incentives available for investments which qualify for EIS or SEIS. Most notably, a social investor who makes a qualifying social investment can deduct 30% of the amount invested (subject to an annual cap of £1 million) from their income tax liability.
What are the advantages of social investment?
In reality, many social enterprises will raise a mixture of both social investment and ‘traditional’ finance such as grant funding. The interests of each organisation will drive and determine the most suitable source of finance for that organisation. The most obvious advantage of grant funding is that there is no obligation to pay the money back. So what are the advantages of social investment?
- Support and advice. Social investors are more likely to be actively involved with the social enterprise and offer support and advice on an on-going basis.
- Sector knowledge. The social investors are likely to invest in social enterprises which operate in a market or sector which they understand well.
- Flexibility. The social investors are likely to be more flexible with the social enterprise as the business grows and evolves.
Looking ahead to the future of social investing
As investment activity in the social investment market is reported upon, and success stories celebrated, the interest in social investing will continue to gain momentum. There is real potential for social investment tax relief to unlock pools of capital, especially early stage start up finance, for social enterprises. Let’s hope that potential is realised.
As with other established investment tax reliefs such as EIS and SEIS, there are a number of conditions which must be met by the social enterprise, proposed investment and social investor for the tax relief to be claimed. If you would like to find out more about social investment or you have any queries arising from this article, then please email Jennifer Noble or call 0131 226 8210.